Coinsurance effect and bank lines of credit

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10 Citations (Scopus)


The coinsurance effect hypothesis predicts that firm diversification reduces financial constraints through imperfectly correlated cash flows among segments. We empirically test the hypothesis by studying the relation between coinsurance effect and bank lines of credit. We find that coinsurance effect is associated with a higher availability of bank lines of credit, and that diversified firms hold a higher level of bank lines of credit if they have higher investment opportunities and if they are bank-dependent. We find that diversified firms hold a higher fraction of corporate liquidity in the form of bank lines of credit due to the coinsurance effect. The findings are consistent with the coinsurance effect hypothesis and contribute to the debate on the value consequence of firm diversification by disclosing a specific channel through which firm diversification affects financial constraints.
Original languageUndefined
Pages (from-to)1592-1603
Number of pages12
JournalJournal of Banking and Finance
Issue number6
Early online date18 Jan 2012
Publication statusPublished (in print/issue) - 1 Jun 2012


  • Coinsurance effect
  • Bank lines of cfredit
  • Firm diversification

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